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What are my employees’ rights in company administration?

If your company has entered administration, you’re probably wondering about the rights of your employees and your liability for any outstanding monies owed to them. Once you have the input of a professional insolvency practitioner (IP), the company’s position will become clearer.

The main aim of the IP will be to keep the company going, whether that involves restructuring or realising some of the assets. Future actions also depend on whether they believe that the business could become profitable again.

Employee rights in administration are largely determined during the first 14 days of the administration process. Members of staff who retain their jobs in this timescale stand a far better chance of recouping any payroll arrears, but they could still face redundancy at a later date.

Begbies Traynor can guide you on your employees’ rights in administration, and ensure that you meet all your obligations under employment legislation.

Employees as preferential creditors

Those employees who keep their jobs in the first two weeks become ‘preferential creditors.’ This places them higher up the hierarchy of creditors, but below secured creditors such as the banks and asset-based lenders.

The administrator takes responsibility for their rights in employment after the initial two weeks of administration, until such time as the business is sold on. If a new company purchases the business, employee rights are protected under TUPE, Transfer of Undertakings (Protection of Employment) legislation.

Members of staff who have become preferential creditors are entitled to claim:

  • Arrears of salary and commission for up to four months’ prior to the company entering administration, and with a maximum limit of £800 per employee
  • Up to six weeks’ holiday pay
  • Certain occupational pension payments

This does not cover all the money employees may be owed. Anything over and above these payments/limits is claimed under ‘ordinary creditor’ status, from the National Insurance Fund (NIF) if there are insufficient monies available from the sale of company assets.

Rights of your employees as ordinary creditors

The first point-of-call for your employees as non-preferential creditors is to claim what is owed from money generated by the sale of assets. In reality, however, there is rarely enough money available to meet these claims.

Your employees have the right to claim from the National Insurance Fund under these circumstances, as long as they have already made a claim from the company within six months of their dismissal. The National Insurance Fund is operated and managed by the Redundancy Payments Service, to whom employees make their application for repayment.

These are the types of payment that can be claimed, with the payment cap currently standing at £475 per week:

  • Up to eight weeks’ wages
  • Arrears of holiday pay for a period of up to six weeks
  • Payment for any statutory notice period that was worked but not paid (up to 12 weeks maximum)
  • Unpaid pension contributions
  • The basic award for unfair dismissal

The statutory notice period depends on how long your employee has worked for you:

  • Between one month and two years: one week’s notice
  • Two years or more: two week’s notice and an extra week for each year worked (up to a maximum of 12 weeks)

It is worth noting that any arrears of statutory sick pay, or maternity/paternity or adoption pay are not claimed via the NIF, but through the Department for Work and Pensions, and HMRC respectively.

Payments and rights in redundancy

If your company employs more than 20 members of staff, you need to make sure that you follow the procedures laid down for collective redundancies, otherwise they may become eligible for a ‘protective payment.’

Your company is required to meet the minimum consultation periods with regards to employee representatives and trade unions, and if these requirements have not been adhered to your staff can claim via an employment tribunal.

If some employees were made redundant during the administration process, and have worked for you for a continuous period of two years or more, they may be able to claim redundancy pay from the National Insurance Fund.

How much they receive depends on their age and length of employment, and there’s a maximum cap of 20 years on their length of service.

If the company is sold on

If pre pack administration is the chosen option for your company, the rights of those employees who have retained their jobs are transferred to the new company under TUPE legislation.

The Transfer of Undertakings (Protection of Employment) is designed to protect the terms and conditions of their employment contracts.

Begbies Traynor specialises in insolvency and corporate recovery, and have  offices nationwide. We are the market leader, and can arrange a free same day consultation to discuss your company’s situation.

Contact our team

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Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland
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